Equity Residential
Q4 2007 Earnings Call Transcript

Published: 7 Feb 2008

[Operator:]

I would like to welcome everyone to the Equity Residential fourth quarter earnings conference call. (Operator Instructions) Mr. McKenna, you may begin your conference.

[Martin J. McKenna:]

Good morning and thank you for joining us to discuss Equity Residential’s fourth quarter 2007 results and outlook for 2008. Our featured speakers today are David Neithercut, our President and CEO; and Mark Parrell, our Chief Financial Officer. Our release is available in PDF format in the investor section of our corporate website EquityResidential.com. Certain matters discussed during this conference call may constitute forward-looking statements within the meaning of federal securities law. These forward-looking statements are subject to certain economic risks and uncertainties. The company assumes no obligation to update or supplement these statements that become untrue because of subsequent events. Now I’ll turn it over to Dave.

[David J. Neithercut:]

Thank you, Martin. Good morning, everyone. Thanks for joining us for our conference call today. Mark Parrell and I are pleased to be joined today by Fred Tuomi, our President of Property Management Company; and David Santee, our Executive Vice President of Property Operations, who will participate with Mark and me in the question-and-answer session after Mark and I complete our prepared remarks. Well, it certainly is an interesting economic environment that we find ourselves having to navigate today, isn’t it? The single-family housing continues to collapse across most of the country, credit markets continue to be seized up, but fortunately the Fed has acted over the last several weeks to provide some much-needed lubricant to get credit flowing again; we hope they are successful in that endeavor. Expectations are that the economic picture for 2008 will certainly be extremely weak. Yesterday’s service sector report was just one more indication that the economy is certainly struggling. So of course we continue to be concerned about the impact all of this will have on the job growth across the markets that are so important to our business and so important to our ability to maintain occupancy and so important to our ability to raise our rents. Meanwhile, however, our portfolio was 94.5% occupied. We have a left to lease of 7.8%, which is very good for us at this point in a seasonal context. By left to lease I mean, that is the true inventory of available units in our portfolio today and that is comprised of our current vacant units plus our notices to vacate, minus those currently vacant and noticed units that are leased but have not yet become occupied. That’s a true measure of our inventory and we are very pleased about where we sit today here in early February at 7.8% left to lease. Outside of a few select markets we are seeing very little new supply and we expect very little new product to get started for the foreseeable future. The home ownership rate in the country continues to fall, down about 150 basis points over the last several years, and this has brought 1.5 million households back into rental housing. That is expected to decrease another 100 basis points again this year alone. So obviously our residents are moving out to buy homes at a significantly reduced rate than our historical averages. Finally, notwithstanding the reductions in the value of the single family homes that we read so much about nearly every day, it’s a simple fact that the premium and the cost to own a home versus the cost to rent is bigger today in nearly all of our markets than it was five years ago. So it’s no surprise that we continue to like our business and the markets in which we operate. They delivered for us in ‘07. We expect them to deliver for us in ‘08 and beyond. Now I’ll ask Mark to take you through our financial results for the quarter.

[Mark J. Parrell:]

Good morning, everyone and thank you for joining us on today’s call. We are pleased to report solid results for the quarter and to share our optimism for a good 2008 despite the stress in the economy that David mentioned. I will summarize some of the important points regarding our FFO results and our same-store operating results, describe our capital markets activities in the quarter, including share repurchase activity, and review our balance sheet and liquidity. I will also talk about our same-store and FFO guidance for 2008. As you saw in our release for the fourth quarter of 2007, Equity Residential’s funds from operations were $0.67 per share, compared to $0.49 per share in the same period in ‘06. We have listed the drivers of this $0.18 difference in our release. As per our quarterly guidance, our operations were overall in line with our expectations for the quarter. Our actual FFO did come in higher than the guidance range we gave you in October. As we said in the release, this difference was due to three factors primarily

[David J. Neithercut:]

Thank you very much, Mark. I will address a little bit on our investment activity first. We continue to be a seller of assets in this marketplace. We sold $173 million of assets in the fourth quarter. Due to the disparity between main street asset pricing and our share price, we’ve essentially shut our acquisition business down, acquiring only two assets in the fourth quarter for $67 million. We do continue to see transactions taking place out there though limited and in limited number compared to past years. I’ll tell you that our guys are underwriting deals, they are keeping their noses in their markets and it’s clear that there continues to be invest demand for multi-family assets and there continues to be availability of financing for assets in all markets, with Freddie and Fannie very much open for business and looking to book loans. So, what does it all mean? Not all that much different from our third quarter call when I said that higher quality assets in better markets have retained much of their value and lesser quality assets in other markets probably haven’t. Direct investors continue to differentiate between asset quality, which means the cap rates for high quality assets in better markets have increased may be 10 to 50 basis points and cap rates on lesser quality assets in less desirable markets have probably moved up 50 to 100 basis points. I want to give you a little bit of color on our own disposition activity and how values have held up within our portfolio. In the first quarter of each year at our March board meeting we review our disposition plans for the year with our trustees. At that meeting we go property by property all of the assets we intend to sell and our expected valuations for each one of those assets. So for the year as disclosed in the supplemental information of the press release, we sold 73 assets for $1.9 billion. That $1.9 billion represented a 4% premium to the gross value as provided to our board last March for those very same assets. So, those 73 assets received 44% greater sales price than what we had told the board they might when we met last March. To look at it a little differently, let’s look at just those assets we sold in the second half of the year around the time financial markets really began to unfold. We sold 35 assets in the second half of 2007. Those were sold for a 7.6% premium to the gross value presented before. Now, this is primarily because we sold eight assets in Charlotte, North Carolina at numbers significantly above our expectation. But of the 35 assets we sold, only four were sold for less than we had indicated to the board and that was an average of 4.2% less. So again, asset values are holding up very well in the multi-family space. Because of the NAV discount at which our shares have been trading we’ve not been aggressively pursuing acquisition for some time and chosen instead to maintain liquidity, current availability as Mark noted in our credit facility of $1.3 billion and we will continue to closely watch the market for opportunities be they acquisition, be they development or expanded share repurchases. Now that being said, our guidance did include $1 billion of acquisitions in 2008 and if we do get to that level of acquisition it will most likely be in the second half of the year. A little bit about the condo business which performed just a bit below the low end of our expectations for the full year with profits of $14.7 million and that compares to the guidance we gave in the third quarter call for the full year of $16 million to $18 million. That miss was primarily due to having closed 30 fewer units in the fourth quarter than we had budgeted. That was due to a combination of two things

[Operator:]

Your first question comes from the line of Dustin Pizzo - BB&T Capital Markets.

[Dustin Pizzo:]

David I know it wasn’t at the time considered to be official guidance but can you walk us through a little bit more detail? What has changed since the third quarter where you discussed the potential for 4.25% revenue growth in ‘08?

[David J. Neithercut:]

Well clearly the economy has weakened since then, Dustin. What I indicated at that time is we thought that we could do 4.25%. I’m not telling you 4.25% is of the table but the economy is certainly weakened. As we look at it today, as we build our budgets from the ground up looking at what’s going on in our markets with respect to job growth and new supply and what’s going on with respect to occupancy and retention of our existing residents, we think that 3% to 4% is a pretty good revenue growth expectation for next year.

[Dustin Pizzo:]

With that in mind, what type of macro outlook are you expecting as it relates to job growth in ‘08?

[David J. Neithercut:]

Well, again, we’re not calling the economy from a top level, we’re looking at it from a ground level up. Fred and Dave and their teams start at each individual property and look at the cost set and understand what’s going on in each individual market and submarket with respect to new supply and who the major employers are and what their expectations are and we build it from the ground up. We’re just looking at the economy as we see it today, and based upon that we’re comfortable with our 3% to 4% revenue growth projection.

[Dustin Pizzo:]

Looking at the ‘08 guidance, the fact that you aren’t including any share repurchases in there, should we just take that to mean that you’re going to continue to be opportunistic rather than your appetite for repurchases is waning somewhat?

[David J. Neithercut:]

Yes. I think that’s a fair characterization, and for purposes of your model it is not going to make a big difference at about, I call it $38 a share and down it’s just minimally accretive as you go down and above it’s minimally dilutive, as you buy stock at that price. So again, assuming we finance this with the sale of assets at cap rates that are at the 5.75%, just minimal, there isn’t a real big impact on your ‘08 numbers.

[Mark J. Parrell:]

The stock we acquired in 2007, Dustin, came essentially with proceeds and with the economy where it’s at today, we think it’s prudent to move forward with the line of credit unfunded and to try and acquire more stock back with proceeds from property dispositions. We’re going to have to navigate some tax issues as we do that, and we are hopeful that we will be able to do that because I think the NAV of the company is significantly more than what the stock is trading at today and I think long term that will be a great opportunity for us and we will try and do that. We provided none of that as part of the guidance.

[Dustin Pizzo:]

The ramp-up in FFO throughout the year to get to the midpoint of guidance from the first quarter, is that largely depended on the lease-up of the development assets or is there something else to driving that?

[Mark J. Parrell:]

There is a couple of things going on. You certainly hit it with that. The lease-up of the asset is sort of back-end loaded. So the lease-up will occur throughout the year and the incremental NOI contribution is more in the third and fourth quarter than it is in the first and second. Also just the NOI builds on itself. As you grow quarter over quarter, it just builds through the course of the quarter to get to that sort of $0.14 incremental numbers. So those are the two biggest drivers.

[Operator:]

Your next question comes from line of Craig Melcher - Citigroup.

[Craig Melcher:]

A question on floating rate debt exposure. After you do this $500 million secured deal in March I think it will put you around 15% floating-rate debt. Is that a level you are comfortable with or do you plan on any other modifications of that during ‘08?

[David J. Neithercut:]

We are comfortable between 15% and 20%. The rating agencies get a bit twitchy as you get over 20%. So I would suggest to you that is the range we generally have operated in and that’s in our history. So will we swap a bunch of stuff to floating? I am not sure, but we are comfortable operating within the 15% to 20% floating rate range.

[Craig Melcher:]

On the developments, David, you mentioned that some you might do later or even bring in deals or sell land. Is that more driven by just uncertainty in the economy or just from a liquidity standpoint where you think your best use of capital is?

[David J. Neithercut:]

I think it’s more of the latter, Craig. I think that it’s difficult to justify construction when you are looking at that relative to our stock price. I will tell you that I think in the marketplace today, a new development is going to be extremely difficult to get done and with what’s going on in the demographic picture and with very little new supply, I think people that are able to deliver product in 2010, 2011 will be rewarded amply. So there are development deals we would like to do, it is just a challenge to justify that capital commitment when the stock is trading where it is at.

[Operator:]

Your next question comes from the line of Louis Taylor – Deutsche Bank Securities.

[Louis Taylor:]

Mark can you expand a little bit in terms of the share repurchase program? Just hypothetically if you did $1 billion of asset sales given the tax constraints to debt covenant constraints how much of that could be available for share repurchase programs?

[Mark J. Parrell:]

First let’s attack the tax part of that question. We can sell between $400 million and $500 million in gross proceeds worth of assets before we will sort of need to either manage that with 1031s or commit ourselves to paying a special dividend. So that’s the beginning of the answer and that’s dependent that little bit of a fair size range is dependent on the margin of those assets so some assets have a lot of tax gain and some have relatively little. That’s the beginning point of the analysis. As it relates to the rating agencies, I certainly think that if we were to buy back with a debt finance structure you would have ratings pressure. With more of this asset finance structure, I don’t see quite as much pressure on the rating though as you get up to $1 billion certainly we will have to continue those conversations with the agencies, they rate the company, we just run it as best we can. So I don’t have any visibility into what exactly they would do, we haven’t had any discussions of that nature with them.

[Louis Taylor:]

In terms of the financing you referenced in March or that’s coming down in March who is the source of that financing?

[Mark J. Parrell:]

That’s a Freddie Mac deal. We bid that out and it was intense interest from both of the GSEs. We did talk to life companies. We even talked just for fun at CMBS World. CMBS World, I can tell you, it seems effectively shutdown. The life companies I think are trying to get back in the business. The GSEs just have a terrific source of funding, are a great source of liquidity to our businesses are supporting asset values and in this case, they are giving us a lot of dry powder. So we bid it out for the two of them, had a great auction and went with Freddie Mac.

[Operator:]

Your next question comes from the line of Kristen O’Connor – Morgan Stanley.

[Kristen O’Connor:]

Good morning. Can you comment on your outlook for the DC market in 2008, and if you’re still concerned about the impact of condo reversions here?

[Fred Tuomi:]

DC is still a good solid market. I am a little concerned about it going into 2008 for a couple of reasons. First of all, with respect to the condo reversions, I think those are done. We had a couple ourselves. Those are stabilized. Actually the one in Alexandria leased up quite rapidly, it stabilized there at 94%, 95% occupancy. We had another condo reversion of our own in Centerville, a little bit further out, took a little bit longer, but we are stabilized now. The reversions that we track in the market is pretty much the same story across the markets there, that’s pretty much done. The issue is not reversions, but reprogrammed condo deals. By reprogrammed deals, what I mean are those that were under construction and in development, committed to underway that before they come to market, they capitulate and convert to an apartment deal straight from the get go. So the reprogrammed deals are adding to an already full pipeline of supply. My issue with DC coming into ‘08 is really a supply issue. So it’s going to take some time to work through that. I think the next couple of years in DC are going to be little bit out of balance in terms of demand and supply. Job growth will still be strong, not as stellar as it was but still fairly consistent as it always is and that may be aided by the change in the politics there. So DC is a great place to own apartments, slightly disruptive right now because of single-family condo issues, but I think that will be absorbed and we will do fine there. As evidenced by not only those reversions that leased up, but we had a ground-up development last year that you may be aware of 24 in the District, and that was one of the most successful lease ups we’ve had in our entire company history with very few concessions and it’s a lots of units right there next to Georgetown and it was a fantastic deal.

[Kristen O’Connor:]

What are concessions running at in the DC market right now?

[Fred Tuomi:]

Concessions, not really an issue in DC market. We see a couple of spots on a spot market basis on a lease up in the District or in the Alexandria/Arlington area where we are seeing a little flurry of new products coming on line, but it’s not a concessionary market; it typically is not. So, most people like us have gone to net effective pricing. Our pricing is holding up fairly well; in fact our renewal increases in D.C. have been very aggressive. We are getting 6%, 7%, 8% increases on in-place leases so we feel good pricing power is still there in D.C. It is really a supply issue and that’s really about it.

[Kristen O’Connor:]

Can you discuss the economics involved with transferring the five properties that were previously going to be converted back to the rental pool?

[Mark J. Parrell:]

We transferred four of the five properties back. The one that wasn’t transferred, Dania Beach has to stay because the company has the intention to sell; that needs to stay in the taxable REIT subsidiary. The other four were transferred. What we do is we go and get broker opinion of values and other things to back up those values and transfer those assets back to the REIT at that number.

[Kristen O’Connor:]

They are not added back to the same pool in 2008 they would be in the non-[inaudible] pool?

[Mark J. Parrell:]

Correct. They are four of those 27 assets I referred to in my remarks that constitute non same-store development lease-ups or condo reversion lease-ups. That’s correct.

[Operator:]

Year next question is from Mark Biffert – Goldman Sachs.

[Mark Biffert:]

I want to talk about some of the market performances. You had a big pop in occupancy in suburban Maryland during the quarter. Also, what’s driving the growth in Denver, Raleigh, Dallas and some of the secondary markets?

[Fred Tuomi:]

With suburban Maryland you did see a good growth not only in occupancy but also in the income there. You can see that for the fourth quarter we are up 8% and finished the full year at 3% and on a sequential 5% to 7%. So, what’s driving Maryland is predominantly the rehabs. In previous quarters we told you we had properties under renovation, rehabilitation, kind of repositioning there in Maryland, those are now coming home to roost, they have been accepted in the marketplace and when that happens you see nice pop in occupancy and income following. So the Maryland market, we saw very good leasing in the fourth quarter. Occupancies came up nicely not only on the rehab deals but on the stabilized as well.

[Mark Biffert:]

What about Denver and Raleigh, where Denver seemed to be an outperforming market overall?

[Fred Tuomi:]

Denver, I love Denver. Denver is a fantastic market for us, we’ve got a couple of things going on there. First is no supply; it was woefully over-supplied coming into the last recession. I think the developers that learned a lesson which is kind of unusual, a lot of restraint there. In the last few years we’ve seen virtually no new development of apartments coming into Denver just like a thousand units here and there, and most of those are tax credit deals. So Denver has been blessed with very good job growth, a well-diversified economy, a lot of good things going on there in Denver, people want to locate businesses there and at the same time, very little supply and not really subject to a housing bubble situation. Also, we have refined our portfolio there with some very good strategic buys and some very good opportunistic dispositions recently. So Denver is very long and we expect that to continue, maybe a little bit less of a pace next year, but still excellent results in Denver next year. Raleigh is an exit market. We have announced our intentions to exit Raleigh. There are some great assets, great people there in Raleigh. We are doing well there right now. We’re 95.6% occupied right now. Income growth was 4% this year. So Raleigh is doing fine, but it is a low cost of housing market. It’s easy to build there, subject to supply shocks and long-term in our portfolios, we are exiting that market. Phoenix is another great story. The worst of times, the best of times. Phoenix was really the poster child for the housing bubble; it was one of the first ones to really get overextended on condos and single family. It was fuelled by some sub-prime buying but also fueled by a great population in household growth and job growth that was off the charts. We saw single-family home pricing in Phoenix probably double in a period of about three years and the spread between rental and home ownership widened substantially. Then the wheels came off, but for a very short period of time. So I would say Phoenix is the first market really to implode but it did exactly as we expected. It never really went negative and it has come roaring back in a good strong recovery. So Phoenix, even though job growth is decelerating, there are still a lot of people moving there, maybe without jobs because they are retirees or are just going there for the great lifestyle. So household and population growth are really important factors to Phoenix. We’ve seen this not only stabilize but really an uptick in Phoenix. We are sitting there right now today at 95% to 96% occupancy and left to lease in the 7% range, extremely healthy and we’re getting good rent increases. There also the condo reversions were the big thing in ‘07, we have competed with a lot of them, including had a few ourselves. Those are all well stabilized now, including the submarkets and we’re really doing an excellent job in Phoenix. I am bullish on Phoenix. Again, like I said, it never went negative and we’re expecting back to 3% to 3.5% growth for next year.

[Mark Biffert:]

Lastly, related to the maintenance expense and CapEx during the quarter on your newly acquired units, I noticed those were up significantly quarter over quarter versus the averages. I am wondering what’s driving the increase, were they older assets that you acquired and you had to put a lot of money into them?

[David J. Neithercut:]

We did acquire some assets, we’ve also acquired some assets in Manhattan where we had indicated a plan to do some significant upgrading there in order to get some rental levels unlocked. So its just a function with the mix, a lot of that was a function of the mix of the units that we have acquired what our ingoing, inbound, capital expectations were. As it relates to just normalized CapEx, our CapEx spend on a stabilized portfolio was very consistent on a year-over-year basis from where was in 2006.

[Mark Biffert:]

The land acquisition that you made during the quarter for $64 million? Where was that?

[David J. Neithercut:]

That was San Jose, a property that I talked about it in my opening remarks.

[Operator:]

Your next question comes from Alex Goldfarb - UBS.

[Alex Goldfarb:]

Just quickly going back to the debt comment, the debt looks to be ticking up from where it closed on the fourth quarter. Can you just walk us through what takes you from that $9.5 billion up to the $9.7 billion to $10.1 billion range.

[David J. Neithercut:]

As we go through the year the development funding that we are going to do plus the joint venture development debt, that 600 is basically driving that numbers. So putting aside development, there would be no change in our debt.

[Alex Goldfarb:]

Then the $500 million Freddie loan that you’re doing, that secured loan, it sounded like it wasn’t a one-for-one secured loan. How much is taking on security and how much is going to end up being additional capital?

[David J. Neithercut:]

During the course of the year we have approximately $550 million of debt maturities. So the $500 million will take out the entire debt load for ‘08. It’s just going to do it earlier in the year so you are going to have cash on the balance sheet from mid-March to about mid-July as the various pieces of debt come due when we pay them off at par. Everything is secured debt in 2008, except $130 million of an unsecured note that matures in the third quarter.

[Alex Goldfarb:]

Going to the asset sale, in the press release David you made some good comments about the disconnect between Wall Street and main street pricing. Given that you are dialing back your acquisitions why not just take advantage in the market and do the sales and then maybe pay like a stock special dividend so you could buy back more stock to reward existing shareholders and really crystallize the arbitrage that exists currently in the market?

[David J. Neithercut:]

Nobody has taken more advantage of the market that we have on the disposition side given that we’ve sold $6 billion or $7 billion of assets over the past three or four years. But we will look at what our options are with our continued plan to sell out of our non-core markets and make the appropriate reinvestment decision at that time.

[Alex Goldfarb:]

There was $1 billion referenced and something with the rating agencies, can you review that?

[Mark J. Parrell:]

As it relates to the rating agencies, as you decapitalize the company by paying special dividends that puts pressure on the ratings. I think the ratings that we have that are at the higher level will be pressured more because we are spilt rated right now. But again these discussions haven’t occurred with the rating agencies and we don’t really know their mindset on that, but of course we will investigate that before we take any action.

[Alex Goldfarb:]

Final question just relates to the asset sales. Are you seeing any change in the buyer’s appetite, the desire for them to buy assets that are already sort of pre-encumbered if you will, so, they don’t have to worry about financing the assets?

[Mark J. Parrell:]

I’d say, no the assets we’ve been selling have been unencumbered assets. We’ve not attempted to sell assets subject to existing encumbrances.

[Operator:]

Your next question comes from William [Egmund].

[William [Egmund]:]

Going back to the condos that are coming back into the rate, on page 24 I assume we are talking about those bottom four properties Everett, Los Angeles, San Jose, and Bellevue?

[David J. Neithercut:]

I am sorry, you’re on page 24?

[William [Egmund]:]

Page 24, yes.

[David J. Neithercut:]

We are talking about the fifth footnote, yes, Dania Beach, Azure, Alameda, Bella Vista, yes those assets.

[William [Egmund]:]

Those are pretty good locations, I mean, if you were able to lease those up over the course of the year annualized you could be adding over $0.01 per share on that. I assume they’re all unoccupied right now?

[David J. Neithercut:]

That’s not the case. Deals that we had been working on for potential conversion that we’ve elected to not go forward, but we’re generally 50% to 70% or so occupied. Now, in addition to that we’ve acquired assets from third parties who had thought about a conversion and decided to not go forward and those assets had been 50% occupied or so.

[William [Egmund]:]

Then turning to lease up in the development pipeline. You got the West End and Boston, and then Redmond Ridge in Washington. The lease up at West End, it looks like it’s something like less than four leases per week over the quarter. In Redmond, the leasing percentage only went from 5% to 8% net, that also looks like a kind of low rate of lease up. Is it an availability issue or what precisely is going on?

[Fred Tuomi:]

First of all in Boston or West End that’s one of the best performing lease-ups we’ve seen in long time, but if you look at the numbers there the entire project which may be 300 units, we only had one building so far which is a 100 units, 104 I think, and that thing is already over 92% leased. That’s being well received in that market and we’ve gotten our rent, we’re pushing the rents up, our existing properties nearby never saw a blip. And now we’re just waiting for the rest of the product to be delivered, coming later in this year. Redmond Ridge is a 55-plus seniors community in Bellevue, Washington outside of Seattle and those do typically lease up slower. There is a long sell cycle, they have to come back several times to visit it, they bring the family, it’s a bigger decision but it’s a product in a community, a master plan community that’s suited for seniors to meet a single family, medical, retail, etcetera. So we just got the product about two weeks ago where we’ve got the sale center, we’ve done a lot of pre-leasing, a lot of community outreach through the network in the seniors market and we opened the doors there running about 30 units pre-leased. You will see that one have a nice pop coming in as we get those people moved in but the lease up velocity will not be as fast as a traditional community which we included in our underwriting from the get go.

[William [Egmund]:]

We are familiar with the slower lease up of some of those properties. Thank you.

[Operator:]

Your next question comes from David Harris.

[David Harris:]

David, I wonder if I could just go back to this question of the guidance in the macro environment. I heard what you said about building the volumes up and I think [static on line] your comfortable level with the forecast over the year, what’s in your head in terms of the performance in the economy? Are you assuming signing off from these numbers that there is no recession?

[David J. Neithercut:]

We are assuming that we are dealing with the economy as we see it today. I’ll tell you that we spent a lot of time with Sam thinking about 2008 and our expectations for 2008. Sam believes very strongly that we will not go into recession, the back half this year will be significantly better than the early part of the year. As we sign off on these numbers we sign off on the fact that we expect things to weaken but not be as bad as people think based upon what we’re seeing on our properties today. I’ll tell you one of my biggest concerns right now is the fact that the people on site are good, hard-working people all across the country that run our properties are going to spend more time reading the paper and listening to the radio and seeing the news than they are reading their own. dashboards Their own on-site dashboards of real-time information suggests that things are okay on site.

[David Harris:]

But you were forecasting in the second half of the year, which obviously a lot of people are assuming a recession, a lot of people are assuming a very, very weak job environment. It sounds like you are taking a rather more optimistic view than perhaps than the consensus on The Street?

[David J. Neithercut:]

I guess we are looking at the same economic picture today that they are and we are expecting job growth to not be as strong today as they might have 90 or so days ago. But you’ve got other factors that we still believe are going to help us fare reasonably well given that economic picture.

[David Harris:]

Mark, as a point of detail and forgive if you addressed this and I missed it. Is the payment in the fourth quarter with regards to insurance and taxes? Which line are they in your consolidated statements for modeling purposes?

[Mark J. Parrell:]

If you go to page 27 the disc ops schedule we sort of parenthetically -- I somehow misplaced page 27 -- they parenthetically say G&A on it. So for the property insurance reserve adjustments, you see real estate taxes and insurance expense and then you see parenthetically to the right workers comp and medical reserve. Those run through property management. Those are all going to run through the operating income item ultimately, but they run through those specific line items on our P&L.

[David Harris:]

About a period for these insurance claims, is there anything else you’re working on with regards to insurance claims or those mostly now history?

[Mark J. Parrell:]

I mean there is always some level of litigation and discussion on insurance claims, but I don’t foresee anything substantial. There is nothing in our guidance as it relates to that.

[Operator:]

Your next question comes from Ryan Watts.

[Ryan Watts:]

Housing prices really have yet to crack, existing home prices have really yet to crack and new home prices probably have a little bit of a ways to go. What is your outlook for how you will fare if housing prices are to retreat another 20% to 25%?

[David J. Neithercut:]

Well, as a I noted earlier there still is, across most of our core markets, a very meaningful home affordability gap notwithstanding the fact that we have seen home prices reduced so far over the last 12 or maybe nine months of so the home affordability gap still exists. In some markets, certainly if you saw another 25% maybe perhaps in Florida, that would be far more painful. But in many markets we operate there is not an overhang of single0family housing and you know we would never expect single home prices to ever adjust by that much. I know perhaps outside of Florida it would impact just a handful of markets.

[Ryan Watts:]

Do you think in most of your markets then where there is an issue like in Florida that it’s more a demand issue not a supply issue? Do you think that most of your markets then are pretty fairly supplied at that point?

[Fred Tuomi:]

I will talk a little bit about that and that is exactly the way I call it in South Florida in particular. We had the tremendous demand built up over the last few years as people came there to build homes, to sell homes, to finance homes. The real estate industry construction and real estate related added just a ton of jobs, a ton of demand in South Florida markets. Those jobs are all pretty much gone or will soon be gone but you still end up with positive job growth. I mean even the downward revision recently done by the economist still have South Florida with positive job growth at or above the national average. So yes there is a short-term backup or decline in demand, but there is still a base level of demand that you had before this level that’s going to carry South Florida through the day. Also there you have very strong above national average levels of population and household growth as you have in migration both domestic and in foreign. So it is a demand reduction, but it is also a stabilizing back to a normal run rate of demand and then the supply is seemingly starting to work through the system. The property that we have that are mostly suburban in South Florida are stabilized, we’re running 94% occupancy, 7% left to lease and pricing has stabilized in South Florida back going back to last July. So now we are seeing a couple of upticks and some inflection points up, I am not ready to call it absolute bottom yet. But we feel very good about South Florida at the beginning of working through this correction phase. So, I think you are right on that aspect. In terms of all the big hype about South Florida and the big glut of condos, it’s highly concentrated at the high end of the market in really one particular area, which is the coastal Miami area, Miami Beach, Belle Harbor, it’s all there. Our portfolio is not there; we have maybe two properties impacted marginally by that. Those two properties by the way are doing extremely well right now but as you get out into the further reaches of the suburban area where normal people would have those reversions have pretty much stabilized in the low 90s and the single family competition there on the rental side you still have a significant spread between our large two bedrooms, three bedrooms. Orlando is a little bit different story. The same picture on the demand side there. Orlando had just absolutely strong growth 50,000 or 60,000 jobs down to 22,000 in ‘07 and we expect it to go down to the teens in ‘08. But it’s still above national average job growth rate that will help us work through the recovery, but it is going to be more delayed. The issue in Orlando is supply also, we’ve got significant overhang of single family homes, existing homes that people can’t sell, new homes aren’t being sold and to a lesser extent the condo piece there. The reversions that we compete against are in a maybe low to mid 80s right now so we still have a ways to go to equilibrium on that piece of it and the single family piece. But we are seeing definite examples where people are renting single-family homes in Orlando. By the way, a lot of people ask about that. It’s true in Orlando, it’s true in Tampa and it’s true in the Central Valley. It’s not true in the other markets that get a lot of talk about the housing overhang.

[Ryan Watts:]

Your other major areas then are fairly healthy from a supply standpoint like you mentioned Denver. Phoenix I was a little intrigued by those comments, Phoenix you said is coming back, but Phoenix was very overbuilt. Don’t you foresee maybe prices for single family homes, dropping further and that could actually compete?

[David J. Neithercut:]

Single family homes may drop further in Phoenix, but remember they almost doubled over three years before the bubble kind of deflated there. So it’s not as affordable on the single family piece in Phoenix that as you may recall in prior years, and I think the underwriting criteria from the lenders going forward is going to be a little bit tougher. So you are not going to have people buying homes as rapidly in Phoenix. Again our portfolio there is more insulated. We have a great portfolio there in Scottsdale and we are in the neighborhood that are more stable in size, a significant run-up in single family pricing there. The only other market I would comment that is problematic Inland Empire. We’ve seen a rapid deceleration in home prices in Inland Empire, a big overhang there. We’re not seeing competition directly from rental homes, but we are seeing now people buying homes in Inland Empire. That’s why you move to the Inland Empire anyway, primarily is to own a home. So we’ve seen just recently an uptick in move-outs for home buying in Inland Empire. That is the only market, by the way, that we’ve seen that is out there.

[Ryan Watts:]

In migration?

[David J. Neithercut:]

In migration continues, Inland Empire still is a great population household machine, job growth machine, but it’s just not to the levels we’ve seen in the past on the job side.

[Ryan Watts:]

On the cap rate side, what is the base that you were starting from when you gave your reference point of 10 to 15 basis points and 50 to 100 basis points for less than [ag] properties?

[David J. Neithercut:]

No, it would all depend on the market. Southern California markets are still low 4% handles and maybe that’s drifted up slightly. New York City, still have handles in the 3%, 3.5% or so range. Seattle is still low 4% to mid 4% , cap rate handle on good quality product.

[Ryan Watts:]

How about Denver and Phoenix?

[David J. Neithercut:]

I would say that Denver is a mid 5% handle on good quality product; Phoenix today, also probably in mid 5%.

[Ryan Watts:]

Have you ever broken out the mix of your properties between A, B and C?

[David J. Neithercut:]

No.

[Ryan Watts:]

Is that something I can try and triangulate through your supplemental?

[David J. Neithercut:]

I suppose one could try.

[Ryan Watts:]

I just wondered if you get the relative age?

[Ryan Watts:]

Yes. Not in supplemental. We do it in the 10-K. I think that our age is listed on assets.

[Mark J. Parrell:]

It’s not primarily the age, it is more the rent level. If you look at the average rents versus age because we have some properties in Manhattan, they are very old, but they are very expensive. That’s why I say you can try.

[Ryan Watts:]

The commitment that you have from Freddie Mac, when exactly is the debt that’s maturing due this year? What month?

[Mark J. Parrell:]

Its due in a variety of months. It is spread out basically from July through December. So it is in the third and fourth quarter. They are not multiple maturities. You have several secured debt pools and one large unsecured note for $130 million. So it is spread throughout the back six months of the year mostly.

[David J. Neithercut:]

I would say that in any normal sort of financial environment, we’d be planning some debt offerings in the latter part of the year. We might be taking this debt down, these maturities and putting them on the line of credit and aggregating them and doing some sort of debt offerings in the third or fourth quarter. But just given the uncertainty out there today and the challenges on the credit side, Mark recommended and I thought it was extremely prudent to just go ahead and get this done today. At the beginning of the year, we knew Freddie and Fannie would have big appetites to book loans, treasuries rally, there spreads stayed tight and we took advantage of the situation and decided to get the money while we could.

[Ryan Watts:]

Are there any outs that the Freddie Mac has in their commitment?

[Mark J. Parrell:]

It is subject to underwriting of each of the specific assets and sort of general review of title and things of that nature. So, there are no substantial outs.

[Ryan Watts:]

At this time you don’t foresee any issue with having that deal get done?

[Mark J. Parrell:]

Not at all. We have borrowed billions of dollars over the years from both Fannie and Freddie and we have closed every single transaction with them as negotiated and as committed upfront.

[David J. Neithercut:]

They are long-term relationship partners of the company and they are absolutely rock solid and I just absolutely have complete confidence in their ability.

[Ryan Watts:]

It’s just the credit markets is awful right now.

[David J. Neithercut:]

No, that is a fair question.

[Operator:]

Next question comes from Michael Boise.

[Michael Boise:]

With your fourth quarter transactions, can you talk about the buyer behind those? What growth rates they are underwriting? Secondly can you talk about what you are seeing on the institutional private capital fund whether the demand has been up, down or where you are seeing that going right now?

[David J. Neithercut:]

I have no idea how buyers of our product have underwritten these assets. But, we have sold assets in the Carolinas, sold assets in Texas; those have been very strong markets all have seen decent year-over-year revenue growth and I’m sure that they expect to see that continue. Given how tight those markets are and how little supply is expected going forward. What was the second question?

[Michael Boise:]

Second question related to the demand from institutional buyers right now.

[David J. Neithercut:]

We still believe that there is demand for core product. We have not been acquiring the types of assets and that we have acquired over the last few years. We have continued to underwrite them and make sure that we understand at what prices they are selling and my conversation with our guys just last week about a particular deal they came in and said there were several offers well above where we would have been willing to bid and it is going to go for a very strong price. So we still believe that there is demand by institutional investors for core product as well as product in the non-core market.

[Michael Boise:]

I think you mentioned $250 million to $300 million in starts this year. Can you touch on the size of the predevelopment pipeline right now and how far would you see ramping that activity up over the next six to 12 months?

[David J. Neithercut:]

I would have you go back and refer to my opening remarks. We talked about $350 million to $500 million of potential starts this year. I also said that we would likely not start some things we are working on and we will consider some land sales of property as well.

[Operator:]

Your next question comes from Rich Anderson - Maxcor.

[Rich Anderson:]

It seems like the tag team strategy to replace Jerry has worked out well and congratulations for that. But just a question to maybe look at the inner workings of a larger equity organization. Did you know Jerry was going to work for Sam, when he resigned?

[David J. Neithercut:]

No. I will tell you that I knew that the day he walked out the door but I will tell you that there was no such discussion and there was no such discussion even of Sam having anything to do with the tribune at the time of the transition plan for Jerry’s ultimate retirement and the elevation of both Fred and David and their moving here to Chicago happened. So that was just something that happened well after the transition plan had been put in place.

[Rich Anderson:]

It always captures my attention when you mention your CapEx number of $1,100 per unit because it is so much different than what your peers say. When you think of the entire cost to run your portfolio including the expense component, how big is that number ? $1,100 plus what and what’s the total number?

[David J. Neithercut:]

If you look at page 25 of the supplemental all that’s embedded in there on the established property line, because different people have different capitalization policies so you’re right, it’s very difficult at times to compare apples and apples but we do lay it out in it’s entirely on page 25 of our supplemental.

[Operator:]

Your next question comes from Emil Sangusey.

[Emil Sangusey:]

David, I wanted to ask you a question on earlier in your comments you laid out your thoughts for this year’s acquisitions and you said that most of that would come in the second half of this year. Can you characterize if your thoughts on the current bid ask spread out there, if I’m interpreting your comment correctly, it seems to imply that you expect that spread to narrow heading into the second half of the year?

[David J. Neithercut:]

We’ve given a 125 basis point spread between the assets that we expect to sell and those assets we think we might buy. The bid asset spread on good quality product is not as wide as one might think given the deals that we’ve been seeing taking place at very strong prices. I guess what I’m suggesting is that our hope is to sell assets and buy stock back if the market changes and there are opportunities and we do end up buying properties, again, it would likely be in the second half of the year because we are not working on anything today.

[Emil Sangusey:]

You mentioned the difficulty in obtaining construction financing out there. Do Freddie and Fannie provide construction financing?

[Mark J. Parrell:]

By charter they cannot.

[Operator:]

Your next question from Anthony Paolone – JP Morgan.

[Anthony Paolone:]

Will Fannie and Freddie offer up takeout financing once developments are stabilized?

[David J. Neithercut:]

Sure, they do a couple of things. Their rule is 90 for 90. So, 90% occupied for 90 days before they finance generally. I’m not going to get in all their programs, I’m obviously, not them. But they have programs that are fairly extensive on a forward basis that they will finance. As the borrower, you take the risk that your deal doesn’t size right. Essentially, you circle the rate, you circle loan proceeds, but if your deal size is up to $25 million, and you circle $30 million, then you are going to pay back that other $5 million with maintenance. So, it’s a program that has not I would suggest you’ve been all that competitive at this point in time, maybe it will become more so.

[Anthony Paolone:]

Switching gears, your New York Metro area performed really well again in light of layoffs on Wall Street and financial services issues. Have you seen any signs of push back on rents, pricing power there, anything of that sort?

[Fred Tuomi:]

The answer is no, we have not. Frankly, I’ve expected it, but we have not seen one resident of ours yet come to an us and say I’m leaving because I lost my job, here is my keys. Our occupancies are still very solid, left to lease exposure very low, I mean the trump deals are 96% to 97% occupied, 4%, 4.5% left to lease. So, we are still rocking and rolling. We saw a little bit of competitive pressure down in 71 Broadway earlier this year when the studio was leased up, they used concessions for a short period of time, those are done now. There are a couple of other concessions coming in Manhattan and some leased-up in that area that you would expect; it’s really not an issue. So, every unit we have available to lease there we can pretty much get leased. We had the little bit of seasonal slowdown due to corporate leaving which is typical, December/January. But we have not been a slowdown in Manhattan yet. Do I expect one? Maybe, but it all depends on what you guys do.

[Anthony Paolone:]

A couple of acquisitions in the quarter, the 6.3% cap rates seem a little high. Any thoughts or color on that?

[Fred Tuomi:]

One of those acquisitions was the 67 year we bought in Bellevue for conversion and the other was a property in Jacksonville, Florida that we are able to buy we put under contract earlier in the year and we have assumed some debt and it took a while but it’s essentially a plus 6% yield on assets. We thought that we bought it at had a terrific price per-door and we’re very pleased with that.

[Operator:]

Your next question comes from Rich Taoli.

[Rich Taoli:]

On the CapEx question I was just looking at that schedule on page 25. You have what is called established properties. Does that correlate to the same-store NOI. If I wanted to look at cash flow, real estate cash flow, forget GAAP and what have you, so we have same-store NOI and then I wanted to actually look at what cash flow ex the CapEx was. Can I get there with this or no? It doesn’t look like the unit counts correlate to any of the same-store pools that you have listed?

[David J. Neithercut:]

They do not.

[Rich Taoli:]

Is there a way to get that? Can we recalibrate this page 25 to do that, to get the same store?

[David J. Neithercut:]

We will note that constructive comment.

[Rich Taoli:]

Just as a point of interest both Colonial and Post I believe have that data and it is pretty telling when you look at same-store NOI growth and then adjust for the growth in CapEx year on year. What happens to post-CapEx NOI growth.

[Mark J. Parrell:]

Maybe we can talk just for a second globally about the number. The CapEx part is pretty flat and total expenses were flat. There is variability in those bottom two, new acquisition and other that just relate again to David’s remark. Less purchasing in older assets in New York and CapEx needed to invest before you can get the rental numbers out. So I tell you that you are right, you can’t triangulate perfectly or get perfectly to it but you can kind of triangulate because your expenses are not up much and your CapEx is essentially flat at $1,100. But we will take that into account and think about that.

[Rich Taoli:]

It would be interesting to look at that. Bad debt expense, what is happening with that? I’m curious because we are hearing, reading a lot in the papers credit cards being pulled back and some other type of pressures. Are you guys seeing anything percolate through your portfolio with respect to people just having a harder time making everyday payments for rents?

[David Santee:]

Hi, Rich, David Santee. Our bad debt is within historical norms. When we factor in our collection efforts on top of that, you have got monies that are paid after move out, we see actually a 23% improvement over our 2006 number. We embarked on a program about two years ago where we instituted instant credit is what we call it. We’ve been able to increase our security deposit base upwards to 40% over last two years. We feel very good about our coverage on the back side, our credit quality has remained constant. FICO scores still in the range, we see no change there.

[Operator:]

Your next question comes from Bill Crow.

[Bill Crow:]

First of all on the left to lease, the 7.8% how does that compare to a year ago? If you could give me a couple of markets that have swung the most in either direction?

[David Santee:]

I would say that you know pretty much we are on track right where we were last year in the 7% range. I would say historically it’s probably been closer to 8% and I think this is where the benefit of the platform and LRO comes in which gives us tremendous visibility into managing these occupancies and rates within our guardrails.

[Bill Crow:]

The second question was on the land, the $400 million of land for development on the books, we’ve seen the homebuilders have to write down a lot of land. I am just wondering whether your auditors would force you to take a look at the valuations, you noted that that you’re seeing some downward pressure on land prices. What might we expect to see in that avenue?

[Mark J. Parrell:]

There is an important according differentiation between us and homebuilders. Homebuilders are essentially buying land as inventory and selling it. They need to mark it to market constantly. We buy land for investments; the impairment test is just different. So we do go through our auditors and with our audit committee a quarterly process that is pretty extensive. We go through the entire portfolio by the way, but with a lot more attention frankly on the development side and we don’t have any visibility into anything at this point.

[Bill Crow:]

Have you done that this quarter?

[Mark J. Parrell:]

Yes sir. By this quarter, you mean the fourth quarter, yes.

[David J. Neithercut:]

Let me just add to that. Mark gave you the accounting definition. The actual true economic answer to that question is through the process we’ve gone through, the land we own the entitlement that we have been able to attain in our properties, we created that. The difference between the true accounting effect and really what we have done. I think homebuilders have been writing off land that they overpaid for that we are in the apple orchard and the corn field; we’ve been dealing with infill property and we believe we have increased it.

[Operator:]

We have a follow-up question from Dustin Pizzo - BB&T Capital Markets.

[Dustin Pizzo:]

David, just to make sure I’m not comparing apples and oranges, the cap rates that you quoted earlier, are those economic or nominal?

[David J. Neithercut:]

Economic cap rates.

[Dustin Pizzo:]

They are economic. So what assumptions are you using in there for CapEx?

[Dustin Pizzo:]

Well, it all depends on the assets that we are selling and the assets that we’re buying.

[Dustin Pizzo:]

On the sales?

[David J. Neithercut:]

Yes, on sales. Our sales, we are looking at our forward, particularly at this time, our forward 12 numbers and then with a replacement CapEx level that would be very consistent with that asset.

[Operator:]

The next question comes from Kevin Kim.

[Kevin Kim:]

Developments with joint ventures, are there any guaranteed returns or minimum hurdles that you have arranged with your partner?

[David J. Neithercut:]

We do have all different deals, they are slightly different. But we do have transactions in which we get a preferred return on our investment capital before there is any distribution or any participation with our joint venture partner.

[Kevin Kim:]

What’s your pro rata ownership? What’s your ownership percentage in your joint venture?

[David J. Neithercut:]

Well, the pure legal ownership in most of those transactions is 50% or so. In many instances, after preferred returns and growth they may participate in up to 50% of the upside. But there are certain thresholds and levels that one has to clear before they would get to that level.

[Mark J. Parrell:]

They are 100% consolidated. We essentially take all of the debt and we take all the asset value at this point.

[Operator:]

There are no questions at this time.

[Martin J. McKenna:]

Thank you, Rebecca. Thank you all for joining us. We appreciate your time today. We look forward to seeing many of you in Florida in March. Have a great day.